Crop insurance industry - how healthy?

With the federal deficit growing by billions of dollars daily, Washington observers expect members of Congress to begin taking a much closer look at farm programs in the coming months.

Although direct and counter-cyclical payments often get more attention, subsidies for federal crop insurance require more outlays from the federal government than traditional farm payments. Could Congress find savings by investigating spending on crop insurance?

Bruce A. Babcock, professor of economics and director of the Center for Agricultural and Rural Development at Iowa State University, says in the latest issue of the Iowa Ag Alert that those subsidies should be a subject for congressional scrutiny.

Babcock, the author of numerous papers on federal crop insurance, says a recent study by the Risk Management Agency of USDA calls the rate of return that U.S. crop insurance companies have received from selling multi-peril crop insurance problematic.

“Since 2000, the average annual rate of return on equity for these companies has been 19 percent,” Babcock notes. “The study also estimated that a reasonable rate of return over the same time period for this line of business would be about 11 percent.”

As you might expect, the insurance industry disagrees with this assessment of profitability. In a report released in early October, the industry argues that “the MPCI program is not as profitable as the P&C (property and casualty) industry and writing MPCI entails greater risk.”

“Arguments over the profitability of the crop insurance industry are to be expected and have occurred often,” says Babcock. “An arm of government, be it the Government Accountability Office (GAO) or the RMA, releases a report that finds excess industry profits. The industry responds with arguments about the flawed accounting standards used by government analysts and then releases its own report that allows it to argue that it cannot absorb any cuts in the taxpayer subsidies that it receives because the industry is already under-compensated.”

The chances that Congress will soon embrace a cut in funding for a program that has generated 20 percent annual salary growth for crop insurance agents who reside in rural areas seems pretty remote, says Babcock.

“After all, Congress and the administration are currently borrowing money to create jobs to keep unemployment down. But eventually, borrowed money has to be paid back. And the only way to pay back money is to raise taxes or cut expenditures.

“But there are economic costs associated with raising tax revenue, so federal programs should be scrutinized for efficiency. In agriculture, the place to start is the crop insurance program. There is no doubt the same level of service can be provided to farmers at much lower cost.”